Confessions of a successful stock picker

It was a marriage made in sharemarket heaven: Greg Perry, regarded as the most successful stock picker in the country, and
Macquarie Bank
, the financial engineers with their listed infrastructure trusts.

From the power of his position as head of Colonial First State’s Australian equities fund, Perry helped bankroll Macquarie Bank’s first infrastructure venture. It was largely his grasp of the potential of toll roads and how infrastructure assets could be structured that helped Macquarie find its famous niche and go on to command enormous fees from a range of innovative listed funds.

But when the man who helped underwrite Macquarie Infrastructure Group says “We are all tolled out" you know the love affair with the Macquarie model is well and truly over.

Despite his view that Sydney now pays too many tolls, Perry still has a love affair with infrastructure and toll roads.

Dubbed “The Freak" for his ability to pick winning stocks when he was running Colonial’s Australian equity fund, Perry was known for intimidating brokers, journalists and even chief executives with his barking phone technique.

But he was also regarded as the most successful fund manager in Australia in the 1990s, and when he left Colonial it was with an undisclosed payout, although his boss Chris Cuffe departed at the same time with $33 million in his pocket.

It was Perry’s genius for stock picking that helped build Colonial’s funds under management from $250 million to $25 billion in 12 years. The performance of key infrastructure stocks was a driver of superior results.

He was a larger-than-life character back then and although it has been eight years since he left Colonial, and more than two years since he closed the doors on his boutique QED Absolute Fund, he is still an ebullient character who tends to proselytise. If you have the time, he’ll cheerfully bend your ear on the crucial role of spending on infrastructure to build the nation.

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And his money is where his mouth is. He has left the institutional world and manages his own money. So where is he invested? Infrastructure, of course.

He is fully invested, with 70 to 80 per cent in infrastructure stocks, and readily admits it’s not the ideal, well-rounded portfolio structure. But it’s what he knows.

What stands out, however, is that Perry takes a big-picture view of investment. Not satisfied with micro-corporate and sectoral analysis, he likes to soar widely, taking a helicopter view of the world’s broader economic, political and market trends.

“To manage equities you need a bigger vision of what will happen," he argues.

It’s this bigger vision that has so often helped him pick trends and make money. This is a man with strong opinions not only about the way the world works, but how it should work.

He warns that Australia is in danger of becoming a “one-trick pony", too reliant on the booming Chinese economy. And he argues vigorously that the federal government is missing a golden opportunity by not tapping into the nation’s superannuation funds to help pay for infrastructure projects.

“We have the most superb savings system in the world, but we can’t get access to it," he says.

“Australia is crying out for more infrastructure. The federal government and superannuation industries need to get together to come up with a solution, such as taking 10 to 15 per cent of the 9 per cent superannuation contribution and putting that money into an infrastructure fund. The fund can target a guaranteed return of bank bills plus 2 per cent, then that money can be used to develop infrastructure."

He reckons governments are reluctant to spend big on infrastructure because of their debt aversion and the likelihood that many projects won’t return what he calls an “accounting profit".

“Infrastructure might not give an accounting profit, but it can deliver an enormous economic profit," Perry says.

Speaking of visionary, he points out that the Sydney Harbour Bridge was built to allow eight lanes, and as a result didn’t reach full capacity for 60 to 70 years.

“In contrast, many of the toll roads built more recently have reached their capacity shortly after they were built."

It comes as no surprise that he is a huge fan of the government’s national broadband network, saying Australia has never achieved decentralisation and this could help it along.

He bemoans the critique that would impose accounting stringencies on a nation-building effort.

Perry acknowledges the US faces economic problems, and in contrast Australia has hit the sweet spot with resources. He is not too worried about a double-dip recession in the developed economies. However, his own investment stance is essentially “defensive", which is how he views infrastructure. So just as Colonial benefited from infrastructure stocks in the 1990s, when it invested heavily in Macquarie Infrastructure Group, enriching both Macquarie and Colonial, Perry now favours stocks such as Transurban, ConnectEast, Australian Infrastructure Fund, and a stake in Macquarie Atlas.

He also had an interest in Intoll, which recently agreed to be bought by the Canada Pension Plan Investment Board for $3.4 billion.

When Macquarie Group split its flagship infrastructure trust late last year, one was dubbed “Good MIG", Intoll, and “Bad MIG", Macquarie Atlas.

Despite his love of infrastructure as an asset class, Perry admits Sydney at least “is all tolled out".

But, he says: “Good toll roads work, and in reality the whole sector went through a stage where they paid out more than they got in, but the global financial crisis put an end to that.

“What I like about infrastructure is they offer a defensive bent to your portfolio, if you’re worried about the global economy, but they still have some growth potential. That’s a wonderful combination."

Perry likes the cash flow that
Transurban
generates and reckons the stock also has some growth prospects, adding that it is worth more than the recent and unsuccessful $7.2 billion bid that the company received from the Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan.

The stock has returned 29 per cent over the past year and trades on a yield of 4.75 per cent.

Another favourite of Perry’s is the
Australian Infrastructure Fund
. “It has wonderful positions in airports all over the country, such as Perth, Gold Coast, Darwin and Melbourne, and I happen to think that Australia’s airports are some of the fastest growing in the world today.

“A lot of them have capex [capital expenditure] spends, but they are all local monopolies and should continue to do very well."

Perry jokes that if he’d been a billionaire five times over, he would have had a crack at the company.

Its chief executive, Dennis Cliche, recently told The Australian Financial Review that the toll road industry needed to look beyond the “availability" of public-private partnership models and develop other forms of financing to sustain future development.

ConnectEast shares have lost around 75 per cent of their value since the EastLink road opened in 2008, closing at 43¢ on Friday. But traffic has been improving, with average daily trips along EastLink up 15.4 per cent over the past 12 months, and toll revenue growth of 20 per cent.

“It’s had a rocky road and got into some financial strife," Perry says, “but now it has a steady balance sheet. It has excellent growth prospects with additional roads feeding into that road in the future."

He still owns
Macquarie Atlas
.

“Some roads will go into the hands of the receivers, but they have an interest in the French road APRR. That gives a valuation alone of about $2 compared to where it is trading now, which is around $1.40."

Perry does hold other stocks and a favourite is eBay, which he reckons is a good buy at around $US24 as it trades on an adjusted price-earnings ratio of less than 11 times with more than $5 billion in cash.

He also holds a stake in Domino’s Pizza in the UK, here and in Europe, while McDonald’s is another favourite stock in the US.

“I do have a generally positive view on shares right now. Along with probably everybody else I butchered a few stocks during the GFC, but I’m comfortable with the markets and my portfolio right now. I still worry how China will sell their goods to other countries which are still suffering, but note that China is spending massively on infrastructure at the moment, which should drive growth.

“Its current $295 billion fast-train project, which will lead to domestic air travel falling after 2012, is noteworthy and visionary," he says.

On the local scene, he thinks Commonwealth Bank offers value and bemoans selling out too early in stocks such as Flight Centre and Wesfarmers. BHP Billiton and Rio Tinto should continue to do well from the China boom, he says.

He is a believer in China and the resources boom, but has at times taken a different path to making money in the east.

One stock that has been a favourite is Hengan International, China’s leading sanitary napkin manufacturer, and the only listed company of its type in Hong Kong.

The stock is trading around $HK74, but 10 years ago was fetching around $HK2.

As positive as he is about China, Perry notes that in 2050, when the one-child policy well and truly kicks in, the working population is tipped to fall back to 750 million from its estimated peak of about 1 billion in 2020.

“The challenge will be what it means for us when all the growth is done. You can’t rely on resources forever, we need to be more than just a one-trick pony."

When it comes to Australia, Perry says we should grow our population. He thinks we should have a summit on infrastructure.

If Perry had his way, there would be plans to tackle decentralisation, to run fast trains to Newcastle, Bathurst and Bendigo, to build new cities and desalination plants, to stop traffic jams on Saturday mornings and to ensure that schools have enough ovals.